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Oakland, Macomb counties: Detroit water department plan lacks details

Oakland and Macomb counties are raising different legal objections as creditors in Detroit’s massive Chapter 9 bankruptcy case, but both focus largely on the future of the Detroit Water and Sewerage Department.

For months, regional leaders in those communities and Wayne County have been negotiating with Detroit Emergency Manager Kevyn Orr over a proposal to form a regional water authority. The authority would boost city revenue by leasing the DWSD assets for at least $47 million a year for 40 years.

Those talks were suspended last month, Oakland County has said, after Detroit asked the regional counties to all make a pledge toward the formation of that authority — something the suburban leaders would not agree to do without completing a due diligence review of the system.

Now Oakland and Macomb have both said in court filings submitted before the objection deadline Monday that the city hasn’t provided creditors enough information about its restructuring plan. Oakland calls the plan “patently unconfirmable” before Judge Steven Rhodes of U.S. Bankruptcy Court and claims it treats creditors with similar claims differently.

“The plan’s distribution scheme could not be more discriminatory,” the county said in its filing in federal court in Detroit.

Specifically, Oakland alleges it has no specifics on which contracts an authority would assume with DWSD’s wholesale and retail customers and no assessment of how the city’s proposed “rate stability plan” for city customers would affect the rates of suburban customers.

In addition, Oakland alleges no information was provided on an a planned $675 million payout that DWSD or its operators must provide to prefund the city’s General Retirement System pension plan in the next 10 years.

The bankrupt city’s amended plan of adjustment, filed March 31, calls for the city to pull $675 million from the DWSD by 2023 to fund the General Retirement System. The city put out a request for information a few days earlier for private companies to possibly take over the department, after talks with Oakland and Macomb broke down.

The city’s request for investors to limit rate increases to no more than 4 percent a year for the next information also asks for bidders to include a $675 million payment to the General Retirement System or a proposal to carve out the DWSD’s share of plan assets and unfunded liabilities.

That request also calls for potential private investor to limit rate increases to no more than 4 percent a year for the next 10 years, while the plan of adjustment includes a “rate stability program for city residents” in the system. The rate stability program would, the city says, “provide for affordability of retail rates to be taken into account in the development of wholesale rates across the system.”

Suburban leaders have said this rate plan could be a mechanism to maintain or lower the rates the water department charges Detroit retail customers on the backs of wholesale users in the suburbs.

The city hasn’t provided “an explanation of why DWSD is being required to pre-fund the (General Retirement System) pension liabilities when no other city department is being required to do so or the legal basis for requiring DWSD to do so” in the plan, Oakland County’s objection states.

Macomb County, for its part, also argues that Detroit hasn’t furnished enough specifics on its plans for the DWSD. But it also contends that Detroit cannot transfer its contract with the regional Oakland-Macomb Interceptor Drain Drainage District, which bought several pump stations, interceptors and other assets from the city in 2009, to another entity without Macomb’s consent under the federal bankruptcy code.

Macomb County said the city hasn’t given enough information to the county and other agencies negotiating over the proposed new water agency.

“Because these services constitute a public service monopoly, the debtor does not have the unfettered right simply to transfer operations to anyone it chooses under any terms it prefers for its own economic advantage or otherwise,” Macomb County said in its objection.

Other creditors who brought objections Monday include insurer Berkshire Hathaway Assurance Corp. and unions for city.

Macomb also contends in court that, because a private buyer or lessor would need to impose rate increases on customers to absorb the transaction cost and the sale or lease proceeds would go into the city’s general fund, those rate increases “may be considered a tax that, under the Michigan Constitution, must be voted upon by qualified electors.”

As part of its objection, Oakland also notes that the city would reduce its pension plan liabilities to the separate Police and Fire Retirement System, to 31 percent to 49 percent of present value and cut benefit payments to those retirees either by 6 percent or 14 percent, depending on whether the plan is approved. Other unsecured creditors are expected to take only 15 percent of what they’re owed under the amended plan.

The city expects to file another plan amendment and disclosure statement next week and on April 17 will ask a judge to let it send the disclosure statement to more than 170,000 voting creditors, including retirees and bondholders, to solicit their votes on the debt reduction plan. The plan calls for cutting public worker pensions and some bond payments.

The ballots will be issued May 1, and creditors must return them with their votes on the plan by June 30. In the pensioners’ case, the city needs not only for a majority of all members of the General Retirement System and Police and Fire Retirement System to vote in favor of the plan, but also those who approve must represent at least two-thirds of the unfunded liability of those who submit ballots.

Bloomfield Hills-based Carson Fischer PLC represents Oakland County as a creditor in the Detroit bankruptcy, while Dechert LLP is counsel for Macomb County.